Introduction

Why Busted Sanctions Lead to Broken Sanctions Policies

THE ISLAMIC REPUBLIC OF IRAN HAS BEEN SUBJECT TO U.S. economic sanctions since 1979, but only in recent years has the U.S. government been really successful in obtaining multilateral support for its efforts to economically isolate Iran. Most notably, in the spring of 2012, the European Union (EU) blocked Iran from employing the Belgium-based SWIFT (Society for Worldwide Interbank Financial Telecommunication) network used by most financial institutions for their international financial transactions. This move, made in concert with aggressive U.S. efforts to isolate Iran's financial system, was designed to make it more difficult for Iran to repatriate the payments for its fossil fuel exports. Denied access to the international financial system, Iran turned to using a commodity that had universal value and did not require accessing the international financial system to convert: gold. In the case of Turkey, Iran began selling its natural gas to the country in return for Turkish lira that it kept in local bank accounts. Iranians then used these funds to buy gold bullion, the trade of which was not subject to international sanctions. Turkish gold exports to Iran subsequently ballooned in the summer of 2012 and reached $1.8 billion in July. In response to the negative publicity these overt transactions garnered, a less obvious method for delivering the gold to Iran was sought. Dubai, in the United Arab Emirates (UAE), was the perfect middleman through which to launder such transactions. Dubai had already served as the locus for sanctions-busting activities on Iran's behalf for the better part of thirty years and had the connections in place to immediately start facilitating the transactions. There was no better venue in the world to carry out such a scheme.

From July to August, Turkish gold exports to the UAE exploded from $7 million to $1.9 billion. The thirty-six tons of gold that Turkey shipped to the UAE in August comprised over 82 percent of Turkish total gold exports that month. Yet how that gold was shipped to the UAE is even more remarkable. Under UAE customs rules, individuals can legally import up to fifty kilograms of gold into the country in a single visit. And so a plan was hatched in which individual couriers—acting on behalf of firms registered in Turkey—would transport small shipments of Turkish gold to the UAE in perfect accordance with the country's laws. Transporting that amount of gold and in shipments that small required couriers to take hundreds of individual trips to Dubai. According to Reuters, most couriers traveled with their gold simply stowed away in their carry-on luggage. As further proof, the story cites the fact that $1.45 billion of Turkey's August gold exports "were shipped through the customs office at Ataturk airport's passenger lounge." Once in the UAE, the gold effectively vanished. With over 8,000 Iranian-owned businesses operating out of Dubai and over 200 ships leaving daily for Iran, almost anything that can be brought into Dubai can be clandestinely shipped out again to Iran. These transactions continued throughout the fall of 2012 and the beginning of 2013—motivating the U.S. government to adopt new sanctions policies targeting entities that trade in precious metals with Iran. Although this legislation curbed Turkey's participation in this "gas for gold" scheme, it certainly won't stop Iran from finding new ways to circumvent the sanctions imposed against it.

This case is fascinating for a number of reasons. First, it is illustrative of the cat-and-mouse game that has evolved between the United States and Iran with respect to the former's sanctions. Iranians have become world-class experts at devising ways of circumventing or undercutting the U.S. and international economic sanctions imposed against it. These skills have significantly contributed to the country's ability to survive U.S. sanctions for the past thirty-plus years. Second, the transactions highlight the critical role that third parties to sanctions disputes can play in undercutting sanctioning efforts. Via their policies, both Turkey and the UAE undercut the effectiveness of the U.S. and EU financial sanctions against Iran. And, finally, the identities of the third parties involved in conducting the sanctions-busting transactions are also intriguing. The UAE has been a close military ally of the United States since 1994, and Turkey is a NATO ally of the United States and most of the EU's members. Their involvement in deliberately undermining their allies' sanctioning efforts against Iran represents an intriguing puzzle in need of an explanation.

The UAE gained international attention for its illicit trade relationship with Iran when it was revealed that the infamous A. Q. Khan proliferation network used Dubai as a central hub for proliferating sensitive nuclear technologies to Iran in the early 2000s. In delving more deeply into the UAE's commercial relationship with Iran, it is clear that the Khan network's activities were not an isolated exception. The UAE had been a leading venue for conducting sanctions-busting trade with Iran since the U.S. government had first sanctioned it. In many ways, Dubai's explosive growth as the Persian Gulf's leading trade hub was linked to its role as Iran's primary entrepôt for circumventing the sanctions imposed against it. When the UAE formally forged a military alliance with the United States in 1994, the UAE's sanctions-busting activities only accelerated further. All the U.S. efforts at making its sanctions against Iran more stringent during the 1990s appeared only to increase the profits reaped by the Emiratis and added little to the pressure felt by the Iranian regime. During this period, American and Iranian firms flocked to Dubai to continue doing business with one another. All this background information became very real for me when I visited Dubai in 2005 and strolled by the scores of dhows docked alongside Dubai's Persian Sea inlet that were stacked high with American products destined for Iran.

There has been surprisingly little research focusing on the causes and consequences of sanctions- busting behavior, especially given its intuitive links to the failure of sanctioning efforts. In observing the states involved in various sanctions-busting cases, there appear to be two distinct profiles for the types of sanctions-busting activities taking place. The first type, as in the UAE–Iran case, appears driven by profit-seeking behavior and relies primarily on the use of international trade. In contrast, the second type of sanctions-busting relationship appears motivated mainly by politics and employs foreign aid. The massive aid packages that the Soviet Union provided to Cuba to undercut the U.S. sanctioning effort against the country during the Cold War exemplify this type of sanctions busting. Although the motives and methods associated with the two types of sanctions busting are different, both appear capable of undercutting the effectiveness of U.S. sanctioning efforts. This book offers the first comprehensive explanation of why both types of sanctions busters emerge and demonstrates the corrosive consequences each one has on the effectiveness of sanctioning efforts.

A clear need exists for a better understanding of how third-party states contribute to the failure of U.S. sanctions policies. The findings of this book should be of interest to students of foreign policy and economic statecraft but also to policy makers charged with the responsibilities of overseeing U.S. economic sanctions policies. Unfortunately, there are no easy solutions to the challenges posed by sanctions busting. Yet the findings from this book and recent reforms in U.S. sanctions policies suggest that U.S. policy makers can become much more effective at addressing the challenges it poses.

U.S. Foreign Policy and Economic Sanctions: A Fatal Attraction?

Since World War II, the United States has played an active leading role in international politics. The United States' enduring foreign policy interests have been in enhancing the country's national security, while advancing U.S. interests abroad and promoting economic prosperity at home. The United States' leadership role in the West during the Cold War, its emergence as the lone superpower following the Cold War's conclusion, and its seat on the UN Security Council have meant that the United States has been politically engaged all over the world. Its foreign policy interests also extend across a range of policy areas, such as economic, environmental, human rights, and international security issues. In the post-WWII era, the United States has been one of only a handful of countries that has possessed both foreign policy interests that extend globally and the capacity to act on them.

With the United States' preponderance of military and economic power, its policy makers have a wide range of policy options available to them with which to pursue American foreign policy interests. U.S. policy makers can pursue policies within the diplomatic, military, or economic realms and employ coercive or incentives-based strategies. In the diplomatic realm, for example, U.S. policy makers can extend foreign governments praise and legitimacy, or, alternatively, they can use public admonishment to tarnish other governments' international reputations. Militarily, U.S. policy makers can offer security guarantees or sell weapons to foreign governments as part of incentives-based strategies, or they can leverage U.S. military power to compel countries into altering their behaviors as part of coercive ones. The final class of policies comprises what David Baldwin refers to as economic statecraft. Such policies seek to influence a target's economic well-being as a means of affecting its behavior. The provision of foreign aid constitutes an incentives-based approach toward using economic statecraft, whereas economic sanctions represent a coercive approach. Although a number of these policy options can often be employed in response to a given foreign policy dilemma, the attendant costs and benefits of each approach affect which option policy makers select.

More than in any other country in the world, economic sanctions have served as the policy instrument of choice for U.S. policy makers. Economic sanctions specifically refer to restrictions that policy makers place on their countries' commerce with foreign states, firms, or individuals to compel a change in their behavior. They tend to be used in response to objectionable foreign behaviors that require a more assertive response than diplomacy alone but in which the use of military force is undesirable. Both of the leading databases that track the global use of economic sanctions indicate that the United States has employed economic sanctions more than any other country in the world—and by a large margin.

A number of reasons exist for why the United States relies so heavily on economic sanctions despite their poor performance. It has long been known in academic and policy circles that economic sanctions have a relatively poor track record of success—achieving their goals only around 23 to 34 percent of the time. Given its preponderance of economic power, though, the United States can more easily afford to absorb the costs of imposing sanctions and can better leverage sanctions in exploiting other countries' dependence on U.S. markets, U.S. capital, and the U.S. financial system. The United States is thus advantaged in using sanctions over most other countries with smaller economies. The United States' active involvement in global politics and its preponderance of power also creates more opportunities for U.S. policy makers to employ the policy. Economic sanctions can serve as an alternative, antecedent, or auxiliary to the use of military force. The high costs associated with using military force abroad can cause sanctions to appear as a low-cost alternative, leading economic sanctions to be used as a frequent substitute for military force when coercive responses are deemed necessary. U.S. policy makers are also thought to rely on economic sanctions for symbolic purposes in response to domestic and international pressure to take action against objectionable behaviors by foreign actors. In such cases, policy makers may deem diplomatic approaches as insufficient, incentives-based approaches as inappropriate, and military approaches as too costly—leaving only sanctions on the table. It also helps that both the president and Congress can impose economic sanctions, and they can do so relatively quickly and with few upfront costs. Even with their poor overarching track record of success, U.S. policy makers thus often view economic sanctions as the most expedient, preferable policy option available to them in comparison to the range of alternative options they could employ. Yet, much as the vast bulk of an iceberg sits out of sight below the waterline, many of the costs associated with using economic sanctions are not immediately observable to U.S. policy makers when they decide to employ them. The real costs associated with the use of sanctions tend to be overlooked or ignored.

Not only does the U.S. government frequently employ economic sanctions when they have little chance of succeeding, but U.S. policy makers also remain committed to failed sanctioning efforts for far too long. When the United States has imposed economic sanctions to achieve a political objective, they have failed to achieve their objectives almost 66 percent of the time. On average, failed U.S. sanctioning efforts last almost nine years—with some lingering on for over fifty years. In the case of the U.S. sanctions against Cuba, U.S. policy makers have been trying to use sanctions to bring about the collapse of the Castro regime since 1960. Rather than abandoning their obviously failing strategy, U.S. policy makers have repeatedly doubled down on their sanctioning efforts over the years. Yet whereas the advocates of those policies have long since left office, the Castro regime still rules in Cuba. This is despite the claims by the Cuban government that the U.S. sanctions have cost it roughly $975 billion since they were imposed. Although experts argue that those estimates are inflated, the cost of the U.S. sanctions to its own economy is likely a nontrivial portion of that figure—and that's only with respect to one country.

Failed sanctions costs come at a high price for U.S. businesses and U.S. workers. It was estimated that during the 1990s the U.S. government's sanctions policies cost American businesses approximately $12 to $18 billion a year in lost exports. In one of the only studies of its type, Gary Hufbauer and his coauthors estimated that the U.S. government's sanctions cost the U.S. economy roughly 200,000 jobs in 1995 due to lost export opportunities. By denying American companies the ability to compete with foreign competitors in some markets, the U.S. government's sanctions can hurt their overall competitiveness. Restrictive export control policies on the export of U.S. satellite technology to countries like China, for example, have harmed the U.S. space industry. These policies also can encourage U.S. firms to relocate their business operations abroad to countries that impose far fewer sanctions. For example, Halliburton's decision to move its corporate headquarters to the United Arab Emirates after it endured congressional investigations into its subsidiary's business dealings with Iran appears consistent with these motives. U.S. sanctions can also encourage generally law-abiding companies to engage in smuggling, fraud, and/or money laundering in order to circumvent U.S. sanctions in pursuit of otherwise legitimate, profitable commerce. And whereas a lot of sanctions-busting trade does not technically break any laws, it often requires business enterprises to violate the spirit in which they were imposed. This forces various federal agencies, like the Department of Treasury and the U.S. Bureau of Industry and Security, to engage in costly cat-and-mouse games in enforcing U.S. sanctions policies against the firms whose businesses the sanctions are hurting. If the political objectives for which sanctions are imposed are valid and achievable, these costs may be justifiable; however, at least two-thirds of the time these costs are incurred for naught.